The objective of this article is to demonstrate the need to abandon the calculation of the Gross Domestic Product (GDP) which computes all financial transactions whether they are beneficial to the population or not with its replacement by the GPI (Genuine Progress Indicator) to measure the economic progress and social well-being of a nation. This substitution is justified by the conclusion that the rise in GDP in several countries shows no correlation with the increase in the welfare of the nation, quite the contrary. GPI, in turn, considers the welfare and environment parameters using the same methodology for calculating GDP, but, unlike this, it subtracts costs due to factors such as crime, pollution, environmental degradation and compromise of natural resources and systems, besides adding to the calculation items such as domestic and voluntary work that do not occur in the calculation of GDP. The justification for replacing GDP by GPI is presented in this article.

1. 1
THE END OF GDP (GROSS DOMESTIC PRODUCT) AS A PARADIGM IN
MEASURING ECONOMIC PROGRESS AND SOCIAL WELFARE OF A
NATION OR REGION
Fernando Alcoforado*
The objective of this article is to demonstrate the need to abandon the calculation of the
Gross Domestic Product (GDP) which computes all financial transactions whether they
are beneficial to the population or not with its replacement by the GPI (Genuine
Progress Indicator) to measure the economic progress and social well-being of a nation.
This substitution is justified by the conclusion that the rise in GDP in several countries
shows no correlation with the increase in the welfare of the nation, quite the contrary.
GPI, in turn, considers the welfare and environment parameters using the same
methodology for calculating GDP, but, unlike this, it subtracts costs due to factors such
as crime, pollution, environmental degradation and compromise of natural resources and
systems, besides adding to the calculation items such as domestic and voluntary work
that do not occur in the calculation of GDP. The justification for replacing GDP by GPI
is presented in this article.
1. Introduction
At present, the progress of a nation or region is measured by the size and growth of
GDP (Gross Domestic Product). In the calculation of GDP, production measures are
carried out in industry, agriculture, services, household consumption, government
spending, business investment and the trade balance. The formula for calculating GDP
is as follows:
GDP = private consumption (C) + total investment (I) + government expenditure (G) +
exports (X) - imports (M)
The concept of GDP came in the 1930s. It was the time of the Great Depression in the
United States after the world crisis of 1929. The current concept of GDP was conceived
by economist Simon Kuznets in 1934. Economist Simon Kuznets wanted to find a way
to measure the economy within the effort to find solutions to the crisis. He began by
trying to measure what was really productive in one significant respect: what really
brought well-being to society. Until then, many statistics had been created. They
showed, for example, how many miles of railroads there were, the amount of iron
produced, the consumption of electricity, etc., but no one had tried to put all of them
together.
Since the 1930s and especially after the Bretton Woods Conference, officially known as
the United Nations Monetary and Financial Conference, a meeting of delegates from 44
nations that met from July 1 to 22, 1944, GDP was adopted as the standard for
measuring and managing the size of a country's economy. Because it is based on a
simple accounting identity, the GDP can be calculated from production data, expenses
or income. It therefore provides governments with a tool to move the main levers of the
economy, but also a measure of success that, because of their widespread use, allows
governments to compare policies as well.
The modern method of measuring the performance of the various sectors of the

2. 2
economy was established by the late British economist Richard Stone. He formulated
the principles of calculating GDP in the 1940s. Stone was immediately recognized, as
was evidenced by the near-instant adoption of his method almost everywhere in the
world. Another form of recognition was the Nobel Prize in Economics, with which the
economist was awarded in 1984. However, GDP does not measure everything by
ignoring the relationship between economic growth and income inequality. Simon
Kuznets was not too proud of what he had helped to create. He did not agree with the
GDP that turned out to be very different from his original intention, that is, his measure
of economic well-being was changed to be a measure of activity in the economy. The
difference is that there are many things that are good for the economy and that are not
good for society. For example, if there are more crimes, it pays more to lawyers and the
police, and that counts in GDP. Nevertheless, GDP came to stay and became the main
way of measuring economic activity after World War II.
2. Economy and conquest of happiness
Happiness is an achievement desired by individuals and also by a community that
shares common interests. Happiness is a subjective emotional state that can serve only
one individual or many individuals in a supportive community. From the point of view
of each individual, happiness can be conquered by the search for self-knowledge, even
with the help of the psychologist and, also, through the education of oneself. One of the
purposes of education, perhaps the most important, is to offer people opportunities and
means to be happier. To be happy, the individual must therefore rely on education and
positive psychology. Humans are gregarious and having bonds of trust and friendship
with other people is an important part of happiness. After all, one of the routes to
happiness is to seek genuinely to contribute to the happiness of others [MURCHO,
Desidério. A Conquista da Felicidade: Os Contributos da Sabedoria Antiga e da
Ciência Moderna (The Conquest of Happiness: The Contributions of Ancient Wisdom
and Modern Science). Available on the website
<http://criticanarede.com/lds_happiness.html>].
Important work on happiness is the Harvard University Adult Development Study. For
more than 80 years since 1930, researchers have been following 268 Caucasian men
who are fair-skinned individuals (white), originating essentially from the European
continent of the Harvard classes of 1939 to 1944, and 456 Caucasian men from the
outskirts of Boston. The first group included individuals aged 19 years, while the
second group consisted of people who were between 11 and 16 years old when the
study began. Based on the experiences of these people and the major events throughout
their lives, Prof. Robert J. Waldinger and his team were able to isolate the
environmental factors that make people happy. And surprisingly, they have nothing to
do with income, wealth, and material goods [PRECISÃO. Felicidade pode substituir o
PIB como medida da economia (Happiness can replace GDP as a measure of the
economy). Available on the website
<http://www.precisaorc.com.br/site/noticia/felicidade-pode-substituir-o-pib-como-
medida-da-economia>, 2017].
Prof. Robert J. Waldinger and his team argue that the main determinant of happiness is
the quality of human relationships in which people who grow up surrounded by friends
and family and who maintain strong and enriching relationships with other individuals
have happier lives. In fact, preserving this kind of lifelong relationship also helps people

3. 3
to live longer. This research confirms that one of the routes to happiness is to seek
genuinely to contribute to the happiness of others. Despite the above mentioned
research of Prof. Robert J. Waldinger and his team infer that the happiness of each
individual surveyed have nothing to do with income, wealth and material goods, ie with
economic factors, it can be said that indirectly the favorably socioeconomic
environment experienced by respondents may have contributed to the conquest of his
happiness.
But beyond the individual happiness that is achieved with the support of positive
psychology, education and the quality of human relationships in which people who
grow up surrounded by friends and family and who maintain solid and enriching
relationships have happier lives, there is happiness of a nation or region determined by
the socioeconomic environment and cultural variables. It is important to identify which
generators of happiness value are public policies that enable people to develop healthy
relationships; how education can encourage positive thinking and collaboration; how
governments can provide life satisfaction with economic, social, cultural and
environmental factors. The collective happiness of a nation can only result from the
political will of its leaders and their populations as the Scandinavian countries
demonstrate. The UN World Happiness Report 2013 shows that the world happiest
nations are concentrated in Northern Europe, with Denmark at the top of the list. The
Economist has stated that the Nordic countries are probably the most well-governed in
the world.
The Nordics have the highest ranking in real GDP per capita, the highest healthy life
expectancy, the greater freedom to make choices in life and the greatest generosity.
Scandinavia is the cradle of the most egalitarian model the world has ever known.
Scandinavian social democracy is an important reference in the formulation of
heterodox (progressive) economic policies across the globe. The success of this model
of society was due to the combination of a broad welfare state with rigid mechanisms of
regulation of market forces, capable of putting the economy on a dynamic trajectory, at
the same time that it reached the best indicators of good social welfare among the
countries of the world. Scandinavian social democracy demonstrates that it is possible
to make economic development contribute to the individual and collective happiness of
a nation.
3. The GDP in question
Criticism against GDP arises after observing that while GDP has grown on average in
most developed countries in the last decade, real wages have declined because most of
the gains of large economies have paid for capital rather than labor. The gains in
productivity and technological innovations of recent times have not necessarily
translated into more prosperity for all population; competitiveness has come at the
expense of income inequality, which shows that growth is not associated with justice
and satisfaction with life. As a result, national governments and international
organizations have begun to look for alternatives for measuring economic and social
progress. During the 2017 World Government Summit held recently in Dubai, this issue
was discussed in depth. The consensus reached is that economic policies need to seek
new and more ambitious goals, related not only to people's income and the country's
productivity, but also to the satisfaction of life and the conquest of happiness.

4. 4
The effectiveness of GDP as a measure of social progress was called into question when
it came to the conclusion that countries seeking to raise GDP take initiatives that may
diminish future well-being. What to do with GDP that has been used as a measure of
progress? Eliminate it? Change it? Replace it with an indicator of happiness? GDP
creator Simon Kuznets himself had stated in 1934 that GDP was not used to assess the
quality of life of a population. Kuznets believed that the well-being of a nation could
only be defined from a national income measure. What is wrong with GDP? Since its
introduction during World War II as a measure of wartime production capacity, the
Gross Domestic Product has become the main indicator of the nation's economic
progress.
Currently, GDP is widely used by policymakers, economists, international agencies and
the media as the primary indicator of a nation's health and economic well-being.
However, GDP was never earmarked for this role. It is just a gross count of products
and services bought and sold, with no distinction between transactions that increase
welfare and those that decrease. Instead of separating costs of benefits and productive
activities from destructive activities, GDP assumes that every monetary transaction
increases welfare, by definition. It is as if a company tries to assess its financial
condition simply by adding all "business activity", thus grouping revenues and
expenses, assets and liabilities. Moreover, GDP ignores everything that happens outside
the scope of monetized exchanges, regardless of their importance for welfare.
The crucial economic functions performed in housework and voluntary work are
entirely ignored in the calculation of GDP. The contributions of the natural habitat to
providing the resources that support us are also not recognized. As a result, GDP not
only masks the collapse of social structure and natural habitat. Even worse, because it
actually portrays this collapse as economic gain. GDP treats crime, divorce and natural
disasters as economic gains. As GDP registers all monetary transactions as positive, the
costs of social decay and natural disasters are counted as an economic advance. Crime
adds billions of dollars to GDP due to the need for prisons and other security measures,
increased police protection, property damage and medical costs. Divorce adds billions
of dollars more through attorney fees, the need to establish second homes, and so on.
Hurricane Andrew was a disaster for South Florida in the United States. But GDP
recorded this as a boon to the economy of more than US$ 15 billion.
GDP ignores the non-mercantile economy of the home and community. The crucial
functions of caring for children, seniors, other household chores and volunteer work in
the community are completely ignored in GDP because no money changes hands. As
the non-market economy declines and its functions move to the monetarized services
sector, GDP portrays this process as an economic advance. GDP also adds to the cost of
prisons, social work, drug abuse and psychological counseling that arise from the
neglect of the noncommercial domain. GDP violates basic accounting principles and
common sense, treating the depletion of natural resources as income, rather than the
depreciation of an asset. As a result, the more the nation depletes its natural resources,
the more GDP increases. GDP increases with polluting activities and then with
cleanings. The superficial cleaning of toxic sites should cost hundreds of billions of
dollars over the next thirty years which is added to GDP. Since GDP added for the first
time the economic activity that generated this waste, it creates the illusion that pollution
is a double benefit to the economy. This is how the Exxon Valdez oil spill led to an
increase in GDP in the United States.

5. 5
GDP does not take income distribution into account. From 1973 to 1993, while GDP
grew by more than 50%, wages fell by almost 14%. Meanwhile, only in the 1980s, the
5% of households increased their real income by almost 20%. However, GDP presents
this huge gain at the top of the social pyramid as a reward for all. GDP ignores the
disadvantages of living with foreign assets. In recent years, consumers and the
government have increased their spending by borrowing overseas. This temporarily
increases GDP, but the need to repay this debt becomes an increasing burden on a
national economy. As countries take loans for consumption rather than for capital
investment, they are living beyond their possessions and incurring a debt that eventually
must be paid. This negative side of the indebtedness of the outside is completely
ignored in the GDP.
4. GPI - the best indicator of economic progress and social welfare of a nation or
region
It appears that the best indicator of economic progress and social well-being in a nation
or region is the GPI - Genuine Progress Indicator, which considers the welfare and
environment parameters using the same methodology for calculating GDP, but, unlike
this, subtracts costs due to factors such as crime, pollution, environmental degradation
and compromise of natural resources and systems, such as water supply. On the other
hand, items such as domestic work and voluntary work are added to the calculation
(SUSTAINABILITY. The Genuine Progress Indicator. Available on the website
<http://www.sustainwellbeing.net/gpi.html>).
The GPI is based on the concept of sustainable income, presented by the economist
John Hicks (1948). Sustainable income is the amount that a person or an economy can
consume over a period without decreasing consumption during the next period.
Likewise, the GPI describes the welfare state in society, taking into account the ability
to maintain well-being at least at the same level in the future. The Genuine Progress
Indicator (GPI) is a new measure of the economic well-being of a nation. The GPI was
the subject of analyzes carried out in the 1980s by Marilyn Waring who studied
discrepancies in GDP in the UN System of National Accounts. The GPI extends the
conventional accounting framework to include the economic contributions of family
and community environments and natural habitat along with conventionally measured
economic output.
The GPI takes into account more than twenty aspects of our economic lives that GDP
ignores. It includes estimates of the economic contribution of numerous social and
environmental factors that GDP rejects with an implicit and arbitrary value of zero. It
also differentiates economic transactions that contribute to well-being and those that
decrease. The GPI then integrates these factors into a composite measure so that the
benefits of economic activity can be weighted against costs. The Appendix to this
article on GPI shows that it is measured by 26 indicators that can be divided into three
main categories: Economic, Environmental and Social.
The Genuine Progress Indicator (GPI) is a concept in green economy and welfare
economics that has been suggested to replace the Gross Domestic Product (GDP) as a
measure of economic growth. The GPI is an attempt to measure whether a country's
growth, increased production of goods, and expansion of services actually resulted in

6. 6
improving the well-being of people in the country. Advocates of GPI claim that it can
measure economic progress more safely, since it distinguishes between growth that is
worth achieving with social welfare of the economic growth as it is practiced today that
does not take into account well-being social.
GPI is intended to provide citizens and policy makers with a more accurate indicator of
the overall health of the economy and how the national condition is changing over time.
Comparing the GDP (Gross Domestic Product) with the GPI (Genuine Progress
Indicator) of the United States from 1950 to 2005, it can be seen that GDP does not
show the reality of the economic system based on economic rationality. GDP distorts
economic truth. Instead of GDP growth (GDP), what is observed is the stagnation of the
economy pointed out by GPI especially from 1975 to 2005. Figure 1 below shows this
fact in an undeniable way.
Figure 1
US GDP AND GPI FROM 1950 TO 2005
Source: Building a Sustainable and Desirable Economy-in-Society-in-Nature. Disponível no website
<https://sustainabledevelopment.un.org/content/documents/Building_a_Sustainable_and_Desirable_Econ
omy-in-Society-in-Nature.pdf>.
In the United States, while per capita GDP more than doubled from 1950 to the present
time, GPI shows a very different picture. It increased during the 1950s and 1960s, but
decreased by about 45% since 1970. In addition, the decline rate in GPI per capita
increased from an average of 1% in the 1970s to 2% in the 1980s to 6% in the 1990s.
This wide and growing divergence between GDP and GPI is a warning that the
economy is stuck on a path that imposes large - and as yet unproven - costs on the
present and the future (COSTANZA, Robert. Building a Sustainable and Desirable
Economy-in-Society-in-Nature. Available on the website
<https://sustainabledevelopment.un.org/content/documents/Building_a_Sustainable_and
_Desirable_Economy-in-Society-in-Nature.pdf>).

7. 7
The GPI strongly suggests that the costs of the current economic trajectory of the
United States have begun to outweigh the benefits, leading to growth that is not
economic. It seems that GPI portrays more truth than GDP for the economy that
Americans really experience in their daily lives. It begins to explain why people feel
increasingly gloomy perspectives despite official statements of progress and economic
growth. The GPI starts with the same personal consumption data on which GDP is
based but makes some crucial distinctions. It adjusts to certain factors (such as income
distribution), adds others (such as the value of domestic work and voluntary work) and
subtracts others (such as the costs of crime and pollution). Since GDP and GPI are
measured in monetary terms, they can be compared on the same scale.
The GPI calculation presented in simplified form consists of the following:
GPI = A + B-C-D + I
A= private consumption weighted by income
B = value of non-market services that generate well-being
C = private defensive cost of nature deterioration
D = cost of deterioration of nature and natural resources
I = increase in capital stock and balance of international trade
Below are the list of factors included in GDP and those considered in GPI:
I. Crime and family breakdown
Social disintegration imposes great economic costs on individuals and society, in the
form of legal fees, medical expenses, property damage and so on. GDP treats these
expenditures as additions to welfare. On the other hand, GPI subtracts the costs of crime
and divorce.
II. Household and voluntary work
Much of the most important work in society is done in domestic and community
settings: daycare, home repairs, volunteer work, and the like. These contributions are
ignored in GDP because no money changes hands. To correct this omission, GPI
includes, among other things, the value of calculated domestic work at the approximate
cost of hiring someone to do so.
III. Income distribution
Both economic theory and common sense tell us that the poor benefit more from a given
increase in their income than the rich. In this sense, GPI increases when the poor receive
a higher percentage of national income and fall when their participation decreases.
IV. Depletion of natural resources

8. 8
If today's economic activity depletes the natural resource base available for tomorrow,
then it is not really creating well-being; rather, it is only borrowing from future
generations. GDP accounts for this loan as current income. GPI, in contrast, counts the
depletion or degradation of wetlands, agricultural land and non-renewable minerals
(including oil) as a current cost.
V. Pollution
GDP generally counts pollution as a double gain; once when it is created and again
when it is cleaned. In contrast, GPI subtracts the costs of air and water pollution as
measured by actual damage to human health and the environment.
VI. Long-term environmental damage
Climate change and nuclear waste management are two long-term costs from the use of
fossil fuels and atomic energy. These costs do not appear in the ordinary economic
accounts. The same goes for the depletion of stratospheric ozone due to the use of
chlorofluorocarbons. For this reason, GPI treats as costs the consumption of certain
forms of energy and chemicals that deplete the ozone layer.
VII. Changes in leisure time
As the nation increases in wealth, people must have more freedom to choose between
more work and more free time for family or other activities. In recent years, however,
the opposite has occurred. GDP ignores this loss of free time, but GPI treats leisure as
something of value. When leisure time increases, GPI increases; when leisure time
decreases, the GPI drops.
VIII. Defensive expenditure
The GDP counts as an increase to the well-being the money that people spend only to
avoid erosion in their quality of life or to compensate for misfortunes of various kinds.
Examples are medical and auto accident repair bills, transportation costs and household
expenses in pollution control devices such as water filters. The GPI counts such
"defensive" expenditures as costs rather than as benefits.
IX. Useful life of durable consumer goods and public infrastructure
GDP confuses the value provided by large consumer purchases (eg appliances) with the
amounts people spend to buy them. This hides the loss of well-being that results when
products are worn out quickly. To overcome this, GPI treats the money spent on capital
items as a cost, and the value of the service they provide year after year as a benefit.
This applies both to private capital items and to public infrastructure, such as highways.
X. Dependence on foreign assets
If a nation allows its stock of capital to diminish, or if it finances its consumption with
borrowed capital, it is living beyond its possessions. GPI accounts for net additions to
capital as welfare contributions and treats borrowed money from abroad as reductions.

9. 9
If the borrowed money is used for investment, the negative effects will be canceled. But
if borrowed money is used to finance consumption, the GPI declines.
5. Conclusion
From the foregoing, it can be verified that GDP distorts the measurement of economic
progress and social welfare of a nation or region, which imposes the need for its
replacement by another more rational indicator that appears to be GPI based in which
governments can evaluate the performance of the economic system and adopt economic
and social policies based on real data and the productive sector and society in general
can act to collaborate in the economic and social development of a country or region.
APPENDIX ON THE GPI (GENUINE PROGRESS INDICATOR)
Factors to be added or subtracted in GPI calculation:
+/- Indicator Brief Explanation
Economic
+
Personal
Consumption
Expenditures
The bulk of GDP as well, consumption
informs the baseline from which the rest of
the indicators will be added or subtracted.
÷ Income Inequality
Using the Gini index, published by World
Bank, and the Income Distribution Index
(IDI), its relative change over time.
(PCE/IDI)*100
Adjusted Personal
Consumption
Formula=(Personal consumption/IDI) x 100.
Forms the base number from which the
remaining indicators are added or subtracted.
-
Cost of Consumer
Durables
Calculated as a cost to avoid double counting
the value provided by the durables
themselves.
+
Value of Consumer
Durables
Household appliances, cars, etc. are not used
up in one year and are considered a part of
household capital. Their value is depreciated

10. 10
over a number of years.
-
Cost of
Underemployment
Encompasses the chronically unemployed,
discouraged workers, involuntary part-time
workers and others with work-life restraints
(lack of childcare or transportation).
+/-
Net Capital
Investment
Capital investment in foreign markets minus
incoming investments from other countries.
If lending (+) if borrowing (-).
Environmental
-
Cost of Water
Pollution
Damage to water quality from things such as
chemicals or nutrients, and the costs of
erosion/sedimentation in waterways.
- Cost of Air Pollution
Includes damage to vegetation, degradation
of materials, cost of clean-up from soot or
acid rain, and resulting reduced property
values, wage differentials and aesthetics.
-
Cost of Noise
Pollution
Noise from traffic and factories can cause
hearing loss and sleep deprivation.
- Loss of Wetlands
Valuates the services given up when
wetlands are lost to development i.e.
buffering of weather, habitat, water
purification.
-
Loss of farmland, soil
quality or degradation
Due to urbanization, soil
erosion and compaction. This indicator is
measured cumulatively to account for all
years of production lost as it compromises
self-sufficient food supply.
-
Loss of Primary
Forest and damage
from logging roads
Loss of biodiversity, soil quality, water
purification, carbon sequestration, recreation
etc. Cumulative affect year over year.

11. 11
- CO2 Emissions
Increases in severe weather is causing
billions in damages. A value of
US$93/metric ton of CO2 emitted is used,
based on a meta-analysis study by Richard
Tol (2005) of 103 separate studies of costs of
economic damages.
-
Cost of Ozone
Depletion
Our protective layer in the atmosphere.
Depletion can lead to increased cases of
cancer, cataracts and plant decline. Weighed
at US$49,669/ton
-
Depletion of Non-
Renewables
These cannot be renewed in a lifetime.
Depletion is measured against cost of
implementing and substituting with
renewable resources.
Social
+
Value of Housework
and Parenting
Child care, repairs and maintenance are
valued equivalent to the amount a household
would have to pay for the service.
-
Cost of Family
Changes
Social dysfunction presents itself early in
family life. Care is taken to avoid double
counting goods and services duplicated due
to split-parent households.
- Cost of Crime
Medical expenses, property damages,
psychological care and security measures to
prevent crime are all included in this
indicator.
-
Cost of Household
Pollution Abatement
Cost to residents to clean the air and water in
their own household i.e. air and water filters.
+
Value of Volunteer
Work
Valued as a contribution to social welfare.
Neighborhoods and communities can find an
informal safety net through their peers and

12. 12
volunteer work.
- Loss of Leisure Time
Compared to 1969 hours of leisure.
Recognizes that increased output of goods
and services can lead to loss of valuable
leisure time for family, chores or otherwise.
+
Value of Higher
Education
Accounts for the contribution resulting
knowledge, productivity, civic engagement,
savings, and health; a "social spillover," set
to $16,000 per year.
+
Value of Highways
and Streets
Annual value of services contributed from
the use of streets & highways. Valued at
7.5% of net stock of local, state and federal
highways.
- Cost of Commuting
Money spent to pay for the transportation and
time lost in transit as opposed to other more
enjoyable activities.
-
Cost of Auto
Accidents
Damage and loss as a result of traffic
accidents. Increased traffic densities are a
direct result of industrialization and wealth
accumulation.
Source: https://en.wikipedia.org/wiki/Genuine_progress_indicator
* Fernando Alcoforado, 79, awarded the medal of Engineering Merit of the CONFEA / CREA System,
member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional
Development by the University of Barcelona, university professor and consultant in the areas of strategic
planning, business planning, regional planning and planning of energy systems, is the author of 14 books
addressing issues such as Globalization and Development, Brazilian Economy, Global Warming and
Climate Change, The Factors that Condition Economic and Social Development, Energy in the world and
The Great Scientific, Economic, and Social Revolutions that Changed the World.